September 8, 2004
Federal Reserve Districts
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The Tenth District economy expanded moderately in late July and August. Consumer spending rose somewhat after flattening earlier in the summer, and labor markets showed further modest improvement. In addition, manufacturing activity and energy activity continued to increase, and agriculture and tourism remained solid. Housing activity eased slightly but was still strong, while commercial real estate remained weak. Wage and price pressures increased slightly but remained modest.
Consumer spending in the district improved somewhat in late July and August after flattening in the previous survey. A majority of retailers reported increases in sales from earlier in the summer, while only a handful of stores reported declines. Sales were also above year-ago levels at most stores. Among product categories, sales of back-to-school items--including children's apparel--were up solidly from previous years, and sales of home furnishings were generally reported as strong. A few stores, however, noted some reluctance by consumers to purchase big ticket or luxury items. Most store managers were satisfied with inventory levels. However, a few stores still needed to trim inventories due to sluggish sales earlier in the summer, while a number of others were having difficulty keeping shelves stocked due to strong sales. Heading forward, nearly all retailers anticipate higher sales through the fall, though some noted that their outlook depended on consumer confidence levels. Like other retail sales, motor vehicle sales in the district improved slightly in late July and August and were back to year-ago levels in most places. Several dealers reported strong increases in sales of imports, and truck sales were generally reported as solid. By contrast, sales of full-size SUVs were reported as soft by many dealers. Nearly all dealers were satisfied with inventories and anticipate solid sales gains in the months ahead. However, several contacts noted that sales growth could be held down for a few months by uncertainty about the economy and the tendency of some buyers to postpone major purchases until after the election. Travel and tourism activity in the district was generally solid in late July and August. Hotel occupancy rates in most areas were up modestly from the previous survey. Airport traffic was down slightly in most cities from earlier in the summer but still above year-ago levels throughout the district.
District manufacturing activity expanded further in late July and August. Most manufacturers continued to report that they were operating at high levels of capacity utilization and that production continued to rise solidly. Some firms also added workers and increased hours. A few plants had trouble obtaining materials, as supplier delivery times increased due to trucking firms' difficulties meeting high demand. Heading forward, most plant managers anticipate continued strong production activity--in part to work off record backlogs but also to fill new orders. Many firms also plan new investments in plant and equipment as well as further increases in employment.
Real Estate and Construction
Housing activity eased slightly but was still generally strong in late July and August, while commercial real estate remained weak. Single-family housing starts edged down in many cities and were also slightly below year-ago levels in a majority of areas. Even so, nearly all builders still characterized new home construction as strong. Building materials were generally available, but several builders said they were concerned about future shortages due to the rebuilding necessary after Hurricane Charley. Builders generally expect construction activity to remain solid in the months ahead. Most residential realtors reported flat home sales compared with the last survey, although sales remained high by historical standards. The strongest sales were reported for mid-level homes. Realtors generally expect some easing in home sales heading forward. Commercial real estate activity was weak in late July and August. Vacancy rates were flat in Denver and Kansas City and were up slightly in some other areas. Commercial realtors generally expect little change in office conditions in coming months.
Bankers reported that loans edged up and deposits held steady since the last survey, raising loan-deposit ratios slightly. Demand for home mortgages and home equity loans increased slightly, while demand for other categories--including commercial and industrial loans--was little changed. A few respondents said strong cash flow was causing some businesses to rely more heavily on internal financing, limiting their demand for bank loans. On the deposit side, all types of accounts held steady. Almost all respondent banks raised their prime lending rates and consumer lending rates since the last survey. Lending standards were generally unchanged.
District energy activity rose further in late July and August. The count of active oil and gas drilling rigs in the region increased slightly from the previous survey and was up strongly from a year ago. Several producers continued to report constraints on drilling due to labor and equipment shortages, and one firm noted that drilling in some locations could become unprofitable if prices for steel tubing continue to escalate. Another contact, however, said oil prices were approaching sufficiently high levels that some alternative oil sources--such as oil tar sands--might become financially viable, and energy contacts in general anticipate continued modest increases in drilling heading forward.
Agricultural conditions in the district generally remained solid in late July and August, though abnormal weather hurt crop conditions somewhat. The winter wheat harvest was smaller than a year ago, and wet harvesting conditions caused some concerns about crop quality. The unusually cool and wet weather also raised concerns about whether spring-planted crops had developed sufficiently to survive a possible early frost. In the cattle market, pasture conditions improved, but herd expansion is expected to be limited by higher costs of acquiring cattle. Cropland values have continued rising, and bankers and producers expect overall farm incomes this year to be at or above last year's high levels.
Wages and Prices
Wage and price pressures increased slightly in late July and August but remained modest. Labor markets showed further modest improvement, as hiring announcements continued to exceed layoff announcements and several large manufacturers in the district recalled furloughed workers. Most firms continued to face few wage pressures. However, a number of energy, trucking, and health care firms were offering higher-than-normal wage increases to keep or attract workers. There were also more worker shortages reported in the manufacturing and retail sectors, causing some increased wage pressures for select occupations. Most retailers reported flat selling prices and expect prices to remain stable heading forward. However, sellers of furniture and flooring reported further price increases due to higher wholesale prices for these products, and some retailers increased charges for deliveries due to higher fuel costs. Although a majority of manufacturers continued to report rising materials costs, there were fewer reports of increases than in past surveys. A slightly higher percentage of firms reported raising their output prices than in the previous survey. However, this increase came solely from producers of steel products and the overall share of firms raising prices was still smaller than in the spring.